What are 'Enhanced Income Multiples' mortgages?

Introduction

Enhanced income multiples are generally for first-time buyers and are provided by lenders want to help people get on to the property ladder

A recent survey interestingly identified that the two most common reasons for potential first-time buyers (FTBs) not taking the plunge were a fear that prices would fall and a fear that interest rates would rise.

Lenders can easily address the second concern with a fixed or capped rate but the former will always be a matter of opinion.

With the media's understandable fascination about property prices anyone forecasting a 30 per cent fall in house prices is almost guaranteed plenty of headlines and so it is easy to understand why some potential FTBs are nervous about buying now after seeing such headlines.

Priorities

However, affording the monthly mortgage payments at current interest rates appears to be less of a concern and it is easy to understand why. Many borrowers can comfortably afford a mortgage on higher multiples than many lenders will offer, but it will depend on their priorities. We all like to enjoy ourselves but how much we spend doing so varies considerably. Just because 5 times income may be too big a commitment for some people who choose to spend well above the average proportion of their income on non-essentials is no reason to deprive others whose priorities are different the opportunity to borrow an amount which for them is affordable and allows them to become an FTB.

Many lenders are now very sensibly adopting a similar approach to some other lenders selectively enhancing their income multiples based on income and product chosen, even up to a fairly high LTV.

Product availability

For example some lenders have announced an FTB deal which they are offering income multiples of 5 times single or 4 times joint income, subject to a minimum single income of £35,000 or joint income of £50,000.

These deals are available up to 89.99 per cent LTV and although it is not flexible it does allow penalty free overpayments up to 10 per cent pa. Several cheaper 5 year fixes are available but nevertheless because of the income multiple on which these mortgage are available it is a useful addition to an adviser's armoury.

Lenders increased income multiples are based on three factors

1. income band
2. credit score (high, medium or low pass)
3. product selected.

The multiple is increased for anyone taking a fixed rate and the longer the fix, the better the multiple. This is all very sensible as it factors in a lot of the influences on what someone can afford. For example, a single applicant earning between £25,001 and £32,500 with a medium credit score taking a 3 year fixed rate could borrow up to 4.7 times income. Someone earning between £32,501 and £100,000 with a high credit score taking a 5 year fix could borrow up to 5.23 times income. On the other hand someone earning between £17,501 and £25,000 with a low pass and wanting a tracker rate could only borrow 3.57 times income.

Income allocation

Clearly people on higher incomes can afford to allocate a higher proportion of their income to mortgage payments as expenditure on other essentials doesn't need to increase in line with their income. Likewise a fixed or capped rate removes the risk of a sharp increase in payments for a period of time. Of course the longer the fixed or capped rate the more protection is offered, giving borrowers more time to see some increase in their income to help meet any subsequent increase in interest rates.

Nothing is forever and just because 3 times income used to the norm doesn't mean it always has to be. The current economic conditions and interest rate environment in the UK are very different to anything we have seen for more than 40 years.

It is believed that lenders helping FTBs and others in this way are responsibly helping to provide an affordable solution to their problems and should be applauded. Their approach is a well thought out and a sensible way of helping borrowers make the most of current low rates, while also ensuring that do they do not over extend themselves in the process.

Works both ways

Offering higher income multiples to borrowers who take longer-term fixed rate deals is a good quid pro quo for lenders and borrowers alike. Borrowers get a mortgage to help them buy their dream home and lenders help their retention problem because they have a customer for an initial period longer than average. Presumably The Chancellor would also applaud a move which encourages borrowers to choose a fixed rate for longer than 2 or 3 years and so everyone should be happy.

For more information contact one of Money Advice Direct's trained mortgage specialists on: 0800 074 6918 or email: mortages@insolvencyhelpline.co.uk